Looking out at the forecast that is calling for more snow in California, NY and CO, I am reminded that the same forecast can bring very disparate reactions. In NY our guess is that they would rather not trudge through snow and slush to get to work while in California to some degree they are happy for some precipitation in spite of some of the flooding. Here in Colorado there are some who are ready for spring although by the look of 1-70, some are quite content with some more powder. We will leave it up to the reader to decide if this author is happy or sad at the prospect of more snow.

The mudslides in CA and the potential avalanche in the mountains of CO remind me of the massive amount of investment products that seem to continually build up in the product development departments of major financial institutions until they create and release an avalanche of new “innovative” products. The adviser and investment committee is now buried under the weight of massive amounts of new products and information. Bring your beacon.

Your attitude toward these products is very dependent on your perspective and how useful you deem the deluge of material to sift through. Our unbiased attitude is borne out of years of insight into the construction methodology and intent of use of these products.

A significant amount of the products out there are either chasing the same benchmark with a slight nuance or they are attempting in some cases to provide a “hedge” for your traditional investment portfolio.  In a competitive world where fees and margin in many cases are on the decline, fund houses even create ETFs to express the same views inherent in their flagship funds. This massive flow of funds into ETFs of fund managers who have won by name recognition in a lot of cases is worrisome at best. The well intended fund families who bring new innovative ideas and products need to be fully vetted as many of this is newly created and untested. Back testing against a hypothetical index does not count.

Here are a few thoughts as you sift through the avalanche of information and products.

1. Beware of products being sold as “diversification” tools. Really worry if they are touted as hedging techniques. There are very few pure hedges out there and inverse index products should be approached with caution.

2. Be open but cautious with products that tout their superior intelligence such as “smart beta”. Beta by definition is not that bright.

3. If a fund complex touts active management AND inexpensive passive management, please ask why.

4. Advisers may not get fired for holding big names with mediocre performance but to live up to the highest fiduciary standard takes a extra step or two.  a. Do not be afraid to replace big name managers or entire fund complexes if they have seen better days or if there is too much institutional risk with one firm’s horse (Seabiscut). b. Seek out unique talented managers who do not create product after product until they are the Walmart of fund complexes. That thoughtful non asset bloated manager could just be a great fit for your clients.

5. Really examine your true goal with regard to risk management and what you are attempting to garner out of the capital markets prior to an allocation in a product. Every placement is client capital. Make it count.

Whatever your snow forecast, equip yourselves with a shovel, a plow, some boots or maybe a pair of skis to simply ride over the piles of new snow. There will be a firm-wide retreat this Sunday to go skiing. That is a wrap from Zenith in Colorado.


Tom Koehler-CIO